Lebanon has been hit by a triple whammy. In order of occurrence this consists of: economic collapse, coronavirus and the demolition of half of its capital, Beirut, by a massive explosion caused by fire coming into contact with a gigantic store of ammonium nitrate warehoused near its port.
There are no words to describe the catastrophe that this represents for the people of Lebanon. Financial crisis has decimated its economy, coronavirus its health and the explosion its real property. The country is at rock bottom.
Even before the blast, “with hyperinflation knocking at the door, electricity to residences rationed like never before, and the coronavirus already testing national hospital capacities, Lebanon’s economic crisis is unprecedented in its eighty years of existence as a modern state. One would have to go back prior to its 1943 independence – to World War I and the final days of the Ottoman empire – to find a similar record of starvation and deprivation …
“Basic services, such as water, electricity, and sanitation have dwindled at an alarming rate, not to mention public education and public health. On top of all of these challenges, a financial crisis, precipitated by burgeoning international and domestic debt, has siphoned off the country’s hard currency.
“This has placed nearly two-thirds of the population in a situation where they have limited access to their bank accounts – many Lebanese, be it dual national or not, have US dollar accounts – and therefore must pay for food and other necessities with the much depreciated Lebanese Lira.” (For Lebanon, the only way out is either revolution or reform by Nabeel Khoury, Atlantic Council, 10 August 2020)
The blast has left 300,000 people homeless, killed at least 200 (though more are bound to be found as rescuers sift through the rubble of high-rise blocks of flats), and injured some 5,000. Helpless in face of this impossible situation, the entire government has resigned, leaving the beleaguered Lebanese people to protest but nobody to hear them.
The Lebanese people have in fact been going out on the streets to demand the resignation of the government for several months now. Expenditure on public services has long been negligible as the government tried to rein back expenditure in order to try to reduce its budget deficit, and a large portion of its resources were directed to buying dollars in order to maintain the dollar peg so that the overseas loans would keep rolling in – except that soon they didn’t.
In the meantime, “the state’s poor performance endangers its citizens. A failure to collect garbage in Beirut in 2015 kicked off demonstrations not unlike the current ones. Politicians found no sustainable solution to the crisis other than dumping the waste across the country’s mountains and seashore. This, in turn, resulted in severe water pollution and renewed local protests.
“The environmental crisis worsened last week when forest fires ravaged Lebanon’s mountains. Crucial firefighting equipment was unavailable because of a lack of maintenance.”
And further: “The dysfunctional electricity system forces households to pay excessive fees for access to private generators. Households rely on bottled water because tap water quality is poor.” (Lebanon’s economic crisis didn’t happen overnight. So how did it get to this point? by Hannes Baumann, Washington Post, 22 October 2019)
The straw that broke the camel’s back and triggered the latest mass protests was a government attempt to address its economic difficulties by tax increases impacting mostly on the beleaguered poor and the middle class, starting with a modest levy on WhatsApp use:
“Lebanon’s drastic downturn came slowly then suddenly. After months of economic slowdown and a dollar liquidity squeeze, rampant wildfires erupted across the mountains in central Lebanon, unchecked in part because the state had failed to maintain expensive helicopters.
“Days later, in an austerity measure to curb its deepening fiscal deficit, politicians proposed taxing WhatsApp calls. Lebanon snapped.” (End of the party: why Lebanon’s debt crisis has left it vulnerable by Chloe Cornish, Financial Times, 31 December 2019)
A deeply unequal society
It must not be thought that government tax revenue in Lebanon was low because low taxes have been enabling the population to live the life of riley. While this is true of a well-off minority, poverty in Lebanon was rife long before the demonstrations started: some 48 percent of the population were then living below the poverty line, and “the top one percent richest adults receives approximately a quarter of the total national income, placing Lebanon among the most unequal countries in the world. The bottom 50 percent of the population is left with 10 percent of total national income.” (Wikipedia, accessed 12 May 2020)
The bulk of tax revenue came in from sales tax (VAT, which of course falls disproportionately on the poor). Of late, such have been the economic straits in which the country has found itself that poverty has been spreading inexorably to the ‘middle class’ – ie, the better-off workers:
“‘We used to have a class that is called a nouveau riche,’ said Soha Zaiter, executive manager of the Lebanese Food Bank, a charity. ‘Now we have a nouveau pauvre, people who used to be middle class.’
“In a sign of the number of families at risk of hunger, the organisation has distributed six times as many food boxes this year as it did for the whole of 2019. Those in need include unemployed white-collar workers from accountants to a former marketing department head, she said.” (Lebanon’s economic crisis threatens to destroy its middle class by Chloe Cornish, Financial Times, 16 June 2020)
Currently, “loan sharking is rife, savings and pensions have been wiped out, and salaries are a fraction of their previous value. Businesses, schools and seats of higher learning, including the distinguished American University of Beirut, are going – or are in danger of going – bust. Hospitals are running out of drugs.” (Who can save Lebanon? by Michael Karam, The Spectator, 25 July 2020)
The government recently warned that it expected the number of Lebanese living in poverty to increase to 60 percent – and that was before the explosion.
It is understandable that the anger of the people has been directed against the government and the rich Lebanese whom every Lebanese government since the foundation of Lebanon has always favoured. The belief is that it is they and their corrupt practices that are responsible for Lebanon’s present dire situation.
Of course, they undoubtedly played their part. However, to attribute sole responsibility to them is to let the major culprit off the hook, that being the capitalist system itself. The corrupt merely position themselves to take advantage of capitalism’s irrationalities.
The Hariri years
The late lamented Rafiq Hariri, former Lebanese prime minister (1992-98, 2000-04) and entrepreneur extraordinaire, is a case in point. After 15 years of civil war from 1975 to 1990, marked by considerable Israeli destructive intervention aimed at expropriating Lebanese territory, an uneasy peace descended brokered by Syrian intervention and by Hezbollah’s routing of the Israelis.
The war had seriously damaged Lebanon’s economic infrastructure, cutting national output by half, and this devastation had to be repaired. However, in a capitalist economy nothing can happen unless someone can make a profit, so the reconstruction had to be financed from outside.
In stepped the billionaire Rafiq Hariri, who had become rich and powerful as a result of being a construction entrepreneur in Saudi Arabia for very many years, and was now poised to use his wealth and influence to make a killing in Lebanon. Heading a construction firm, Solidére (la Société Libanaise pour le Développement et la Reconstruction), he enthusiastically organised the borrowing by Lebanese banks of vast sums from abroad to be lent to the government so that it could pay very generously for his firm’s tireless rebuilding of Beirut.
Similar opportunities were created for the whole class of his cronies. To ensure that the money kept rolling in from lenders and depositors, the loans carried interest rates well above average and the Lebanese currency was pegged to the dollar at the rate of 1,500 Lebanese pounds to one dollar to reassure depositors that their holdings would not become devalued as a result of inflation.
There was never a care for how the loans, or even the interest, would be repaid, but then if enough interest was offered you could always borrow more. In other words, it was a gigantic Ponzi scheme, the beneficiaries of which were Rafiq Hariri and his cronies – ie, the Lebanese ruling class – mainly drawn from the sunni muslim community like Hariri himself.
Over the last decade, “the central bank, Banque du Liban, liberally hiked its interest rate for depositors to fund the government’s spiralling debt problem, as well as to pay for its substantial volume of imports, and to draw in dollars to help maintain the Lebanese pound’s 22-year-old peg to the US currency”. (What is behind Lebanon’s deepening financial crisis by Nicholas Larsen, The Banker, 10 February 2020)
“By 2019 the state was using almost half its revenues to service external and domestic debt – the other half largely went on public wages.” (Chloe Cornish, FT, op cit)
One serious result of all this was that the government lacked the resources to bring the country’s electricity supply up to standard, as a result of which Lebanon suffers lengthy power cuts that nobody has been able to redress since the end of the 1975-90 war.
End of the party
Sooner or later the whole house of cards had to collapse, and it did.
“In the past five years, as public debt mounted and the current account deficit widened – to 176 percent and 24 percent of gross domestic product respectively last year, the government says – a heavily dollarised economy ran out of dollars and juddered to a halt.
“The government says the economy shrank by 6.9 percent of GDP last year and expects a further contraction this year of 13.8 percent – a full-blown depression with an estimated 48 percent of people already below the poverty line.” (Lebanon’s warning of economy ‘in freefall’ is an understatement by David Gardner, Financial Times, 6 May 2020)
Lebanon’s debt represents one of the highest government debt-to-GDP ratios in the world. This would not matter too much if the country had the resources to service it – as, for instance, Japan is able to do with respect to an ever higher debt level – but that is not the case with Lebanon because Lebanon is devastatingly low in productive capacity – the capacity to generate wealth internally.
Lebanon has to import almost everything it needs, even the bottles and corks that it needs in order to be able to package its one relatively thriving product – ie, wine. Lebanon’s industrial base accounts for only 8 percent of its GDP.
Run on the banks
The protests themselves accelerated a run on the banks, already very short of ready money since most of the money deposited with them had been lent to the government. “Even before the protests began last month, about $3bn had been withdrawn from Lebanese banks, the central bank governor, Riad Salameh, told reporters this week. Another $2bn was pulled out after banks reopened after the first two weeks of protests.” (Economic crisis looms as protests rage in Lebanon by Ben Hubbard, New York Times, 15 November 2019)
The result was that “in October, the country’s banks, which had managed to stay open during Lebanon’s bloody civil war, closed for two weeks. The union of banking workers said it was for safety; economists suspected they were low on dollars and trying to avert a bank run. But by closing … the banks themselves triggered panic, while their informal capital restrictions generated an ‘accusation that the big depositors were able to get out’.
“When they reopened, guarded by soldiers, clerks told panicked customers they could not send money abroad, nor withdraw large sums in dollars. ‘We’re all in it together,’ bankers told clients – but rumours swirled that the politically connected mega-rich had already got their money out, even as customers could withdraw only $200 per week in cash.” (Chloe Cornish, FT, op cit)
In a mere three months, from March to 1 May 2020, two-thirds of national income vanished, and the Lebanese pound devalued by 60 percent, sweeping away the once stable exchange rate that had enabled the professional classes to afford their European lifestyle, as well as hugely increasing the price of imports, on which, as we have seen, Lebanon has for years been excessively dependent.
Sponsors dry up
Since people’s access to cash has been so severely restricted, local demand for goods and services has plummeted, with the result that huge numbers of businesses have been bankrupted and permanently shut up shop. Dismissed employees have little chance of re-employment in the circumstances, thus even further reducing demand and presaging yet further closures.
And all this was even before coronavirus struck and the blast that destroyed half of Beirut!
It became impossible to attract enough investment. Saudi Arabia, which in the past had intervened to help out the Lebanese banks, was itself in financial difficulty because of plummeting world oil prices – quite apart from being reluctant to continue to help out a country in which the hated Hezbollah, the ally of Iran, had gained such massive influence among the popular masses as well as a prominent part in government.
Another event that appears to have spooked the investing community and may well have triggered the original run was the curious 2017 disappearance and resignation of Saad Hariri, the son of Rafiq, the then elected prime minister of Lebanon.
The Financial Times considers it likely that “the trigger for the current crisis was instead the mysterious resignation and disappearance of Prime Minister Hariri in Saudi Arabia in November 2017, which may have spooked wealthy Lebanese depositors and encouraged them to move funds out of Lebanon. The strange incident saw Hariri publicly resigning from his position in a televised statement from Saudi Arabia on 4 November 2017.
“After the appearance he could not be traced for more than 10 days, sparking fears he was being held hostage by the Saudi leadership. Eventually, thanks to the intervention of French president Emmanuel Macron – which saw the French leader officially invite Hariri to France – Hariri re-emerged and was able to return to Lebanon, where he immediately rescinded the resignation and was reinstated as prime minister.” (Understanding the Lebanese financial crisis by Fadi Hassan, 20 December 2019)
It is more than probable that what investors could smell is cold feet that in turn made their own take giant strides.
All this culminated, predictably, with Lebanon defaulting on a $1.2bn payment for foreign bonds – the first such default in Lebanon’s history. This caused it to apply to restructure $90bn of its foreign debts – ie, to lengthen the repayment period to something more manageable. Creditors, however, are not likely to agree to this unconditionally.
Lebanon obviously needed to produce an audited economic recovery plan to demonstrate to creditors how they would be likely to get more of their money back if they agreed to restructure their loans, and such a plan was released on 30 April. Part of the package involved Lebanon seeking $10bn in aid from the International Monetary Fund.
But, as Ben Hubbard of the New York Times ruefully noted: “previously promised aid has never arrived because Lebanon has failed to make progress on the funders’ required reforms”. (Lebanon’s economic crisis explodes threatening decades of prosperity, 10 May 2020)
The major ‘reform’ required is getting rid of Hezbollah, the Lebanese resistance movement that is on the US’s list of ‘terrorist’ organisations. Without that, imperialism’s purses are going to remain tightly shut. Jeffrey Feltman of the Brookings Institute has been disarmingly frank on this question:
“Previous proposed support packages for Lebanon were implicitly (and often not-so-implicitly) designed to strengthen the legitimate state institutions relative to non-state actors, especially Hezbollah. As this government [the government headed by Hassan Diab which has now resigned] relies exclusively on Hezbollah and its allies for its parliamentary support, that traditional justification for external assistance no longer works.” (Lebanon’s latest reform-for-support plan, 4 May 2020)
Even after the shocking explosion, the rich imperialist countries are not prepared to disburse any significant amount of their ill-gotten gains for the humanitarian cause of relieving suffering. Help is conditional on submission.
It is clear that imperialist concerns are only prepared to lend vast sums to Lebanon in order in this way to be able, as creditors, to control what is a geopolitically critical region. They are willing to suffer losses on the loans in return for having that control – much cheaper than the $38bn that former US president Obama committed US imperialism to providing in military assistance alone over a 10-year period, and which costs American taxpayers over $10.5m per day.
The whole point of the unrepayable loans, apart from diverting a large proportion of a country’s GDP in an imperialist direction by way of interest payments (thereby ensuring it remains indigent), is to hold a sword of Damocles over the heads of governments that have borrowed more than they can repay by the implicit threat of withholding further loans and letting their people starve and rise in rebellion against their ‘corrupt’ rulers should the imperialist diktat be defied.
The problem with Hezbollah is that it is no respecter of imperialism’s wishes and a government led by it would be unlikely to enforce the austerity conditions that the IMF and other imperialist outfits attach to their loans. As is clear from what has been said above, the Lebanese masses are in no position to survive further ‘austerity’.
Another problem for imperialism is that Hezbollah is popular with the Lebanese masses not only because it drove an Israeli army of occupation off Lebanese territory but also because it is a major supplier of the social services (hospitals, schools, etc) that the various Lebanese governments have neglected.
Frantic efforts are being made at the moment to put the blame for the Beirut blast on Hezbollah, but it is most unlikely to be the true culprit. And it is self evident that the collapse of the Lebanese economy cannot be attributed to Hezbollah, even if it is no more able to effect an instant cure than anyone else.
An IMF loan would at very least require the handing over to ‘international control’ – ie, imperialist control – the revenues from the estimated 1.7bn barrels of oil and 122tn cubic feet of natural gas which surveys suggest that Lebanon owns – rather than letting the Lebanese people get their hands on any benefit from it.
After close to two decades of unconscionable depredations, there is no quick fix for Lebanon. It clearly needs to act fast to make itself self-sufficient in the necessaries of life – which could certainly be achieved by mobilising for the purpose all those people currently unemployed or underemployed.
However, for this to be done efficiently would require a centrally-planned socialist economy, driven not by profit but solely by the need to satisfy the requirements of the people.
Until the Lebanese people are in a position to install such a system, there can only be more trouble ahead.